Here’s the secret:
Unless you have a budget (or targets) for the financial side of your business, how do you know if you’re improving or going backwards?
Not many business owners actually prepare a 12 month budget for their business, but this is probably one of the most important things they could do to drive their business forward.
You Must Do This IMMEDIATELY
Please – sit down this weekend, review your Profit Statement for the 12 months to 30 June 2013, and simply plan out for the next 12 months.
The easiest thing to do is simply increase last year’s revenues by a chosen amount such as 5%. In reality, no-one can confidently predict the future, but predicting the exact amount is NOT what we’re trying to do here. You simply want a target (higher than last year) to aim for.
Purchases (cost of sales) and salaries are typically the largest expenses of most businesses. Once again, project out the next 12 months with your increased wages and set your gross profit margin as a percentage of your projected income.
Other operating expenses can be increased by CPI (inflation) or by your exact amounts if known (eg. rent).
Once you’ve projected revenues and expenses for the next 12 months, you can calculate your projected monthly profits.
Question: Are your projected profits higher than last year’s (2013’s) profits? If not, why not? Are you planning to go backwards? Go back and see if you can increase your revenue forecasts or trim your expenses a small amount so that your projected profits can be higher?
We like to see profits increasing by 10% each year.
Your “On Track” Reports
Now that you have something to aim for each month, you MUST by the middle of each following month compare your actual results with your forecasts.
Online accounting software systems like Xero make this process incredibly easy – once you input your budget, you can click one button to prepare an “Actual –v– Budget” report. (Ask us TODAY if you’d like us to set this up for you!)
You can then review whether your revenues and expenses are higher or lower than your forecasts, and with your management team you can each month discuss what you can do to improve things, or simply celebrate having a good month.
You’ll be amazed that even in tough economic conditions, aiming higher and regularly reviewing your results will lead to better business decisions throughout the year – and in most cases a higher profit each year.
Try it and let us know how you go!